By Stuart Talman, XE currency strategist
Risk-positive flows continued through Friday’s sessions, bringing to conclusion an eventful first quarter, the market flipping through multiple narratives and ultimately shrugging off a mini-banking crisis that threatened contagion.
US equities extended their strong run, rallying for the third consecutive day. Friday’s 1.44% gain lifts the S&P500 within 2% of its year-to-date peak, marked in early February. US stocks and other risk assets had rallied throughout January on the narrative that the US economy was strong and resilient – strong macroeconomic dataflow suggesting a recession would be miraculously avoided.
Positive risk sentiment deteriorated through February as the higher-for-longer narrative supplanted the soft-landing narrative, market participants concerned that stubbornly high inflation would require the Fed to hike the target rate through 6%.
Bond yields ripped higher, the dollar surged, US equities were pummelled, and the New Zealand dollar logged year-to-date low at 0.6084.
Early March, the cracks started to show.
Banking sector turmoil, concentrated in the smaller, US regional banks and the perennially troubled Credit Suisse, threatened to spread. US bond yields plummeted dragging the dollar lower, the market betting the Fed would pivot to emergency cuts to ward off a broader financial crisis.
With the crisis averted (for the time being), the past fortnight delivered a risk rebound as the market bought into the argument that the Fed’s hiking cycle is done – tighter bank funding conditions replace the need for the fed to hike beyond 5%.
Around 40bps of cuts now priced in from the second half of 2023.
Which, many would argue is not a bullish backdrop for stocks and other risk sensitive assets including the New Zealand and Australian dollars.
The Fed cutting rates in 2H will likely be required due to a re-escalation of banking dysfunction or some other crisis…..some tip will be caused by the commercial property sector.
This is not good news for risk assets.
Yet despite the bond market predicting trouble through the backend of 2023 and into 2024, US equity markets continue on their merry way.
Friday’s 1.73% gain for the Nasdaq saw the tech index climb 6.69% for the month and a mammoth 16.77% for the quarter – the largest quarterly gain since the second quarter of 2020, when markets were rebounding from their covid lows. You then have to head back to the first quarter of 2012 to observe the next largest quarterly advance.
Tech stocks typically outperform in low interest rate environments and/or when interest rate expectations are falling.
More evidence was presented during Friday’s US session that inflation is receding, boosting hopes that at 4.75%-5.00%, the Fed funds target rate has reached its peak.
Personal consumption expenditure, the Fed’s preferred inflation gauge, rose less than forecasted, the annualised rate falling from 4.7% in February to 4.6% (vs 4.7% expected) last month.
Fed fund futures currently assign a 50/50 split between Jay Powell and his FOMC colleagues opting for another 25bps hike versus keeping the policy rate on-hold.
This week’s US employment report (FRI. evening) and the 12 April CPI release the two key data points that will influence expectations for the Fed’s 03 may decision.
Strong jobs growth and a hot CPI – pricing for 25bps firms, the risk rally falters.
Inline to weak reports – the Fed can pause…..risk assets extend higher.
Closing the week near 0.6250, the New Zealand dollar looked well placed to close above 63 US cents for the first time since mid-February, bid throughout Friday’s local session. Breaking through important technical resistance an 0.6270, the Kiwi logged the week’s high a few pips shy of 0.63.
Paring gains, range bound trade punctuated overnight trade, NZDAUD tracking sideways between 0.6240 and 0.6270. Advancing just shy of 1% for the week, the Kiwi was the second strongest performer amongst the G10 cohort, outpaced by the Canadian dollar (+1.80%).
It was a negative quarter for the Kiwi, shedding -1.50% against the dollar. The Australian dollar the worst performer, shedding close to -2% through 1Q.
Through the second half of last week, we flagged the ascending triangle pattern that NZDUSD price action formed over the past 6 weeks – a bullish pattern that seeks to predict a topside breakout.
Whilst NZDUSD did pop above 0.6270 resistance, we need to see follow through buying and consolidation above 63 US cents over the next 48 hours to confirm the bullish break and further short-term gains.
If the Kiwi fails below 0.63 this week, the neutral bias is maintained as choppy, range bound trade between 0.61 and 0.63 prevails.
In an Easter shortened week, the US employment report is the headline act – 240K new jobs and the unemployment rate remaining at 3.6%, the consensus forecasts.
Regionally, it’s a huge week – both the RBA and RBNZ providing their latest monetary policy updates on Tuesday and Wednesday, respectively. The RBA is tipped to keep rates on hold at 3.60% whilst the RBNZ is expected to lift the cash rate by 25bs to 5.00%.
Having bounced during over the last two trading days of last week, NZDAUD rises to again test key resistance at 0.9360. On the balance of things, there may be a higher probability that the RBA delivers a hawkish surprise (via a 25bps hike) relative to the RBNZ…..if this plays out, NZDAUD aggressively reverses.
If the RBA delivers a dovish on-hold decision, signalling that the tightening cycle may be done, look for the pair to rocket through 0.94.
Other data points of note for the week include ISM Manufacturing and Services PMIs for the US economy, Japan’s Tankan survey, Canadian jobs numbers and US ADP Employment change.
Should US equities continue their ascent, the New Zealand dollar likely established a foothold above 63 US cents in the lead up the pivotal US employment report. We’ll be closely monitoring the 0.6270 – 0.6300 resistance zone to signal near term direction.
A break above here in conjunction with a favourably softer than expected non-farm payrolls data point, a path back to 65 US cents emerges for the Kiwi.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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